MITPressLog

Single-Supplier Relationships—Does Ford Know the Risks?

In an article in The Wall Street Journal (subscription), Jeffrey McCracken  reported  that Ford Motor Company is in the process of overhauling its supplier relationships, concentrating on single supplier strategy. In essence Ford will be giving more business to fewer suppliers. Yossi Sheffi, author of The Resilient Enterprise: Overcoming Vulnerablility for Competitive Advantage provides some interesting insight on why Ford is doing this and what the possible implications of going to single-supplier relationships are:

The strategy is one that many businesses have embraced for the last two decades. Many companies have outsourced non-core functions and then consolidated much of their procurement of products and services with a smaller number of suppliers. The rationale is clear:  being positioned as one of the company’s supplier’s most important customers the company enjoys top priority while giving the supplier the economies of scale it needs to pass on lower costs in the form of more competitive prices.

But when Ford or any other company comes to rely heavily on a single supplier for any critical system or part, it should realize that despite being a separate corporate entity that supplier becomes a critical link in the company’s supply chain – in a sense it becomes an important part of the company’s own organization. In the same way the company pays attention to the various risks facing it, the company should develop deep and strong relationships with critical suppliers and be aware of their planned actions and the ramifications for the company and its customers. The company should try to avoid surprises like the one that gave Land Rover a nasty shock in December 2001 when it failed to realize that UPF Thompson, its sole supplier of chassis for the Discovery vehicle, has just gone bankrupt, disrupting production and ultimately leading to a large payment to the supplier to help keep it afloat.

Staying One Step Ahead of Trouble

In today's Wall Street Journal review of The Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage George Anders explains why every company can benefit from contingency planning, whether they are located in a disaster prone area or not. But how can companies (especially small ones) afford to do this? Yossi Sheffi says that investments in resilience and flexibility—even small and fairly inexpensive ones—can not only reduce risk but create a competitive advantage in an increasingly volatile marketplace.   Anders says that:

"It's not just bad weather that businesses must prepare for. Catastrophe takes many forms....The Resilient Enterprise is more than a grab bag of stories about fires, thieves, and tornadoes.  It is the timely analysis of an important—and overlooked aspect of business strategy.  Mr. Sheffi argues that crisis control can be a competitive advantage for companies that get it right.  Wise planning at headquarters is part of the answer, but only part: Companies need a whole culture of flexibility.  It is impossible to know where trouble will hit next, but it is possible to create an atmosphere in which people at all levels respond to disruptions quickly and confidently.  Metaphorically, levees can break at any time."

Read the entire article at wsj.com (subscription required).

Software Development and Extreme Sports Really Do Have Something in Common

Richard Waters finds that the next big business idea may come from an unexpected source in an article called "How Open Source Gave Power to the People" which appeared in the Financial Times recently. The article references the ideas in Eric von Hippel's Democratizing Innovation.

As related by Eric von Hippel, professor of management and innovation at the Sloan School of Management at MIT, followers of extreme sports have become expert at adapting and refining the equipment they use. Sometimes, the way these informal communities work can look very similar to the way open source software developers create their elaborate products.

Kitesurfers, for instance - who stand on surf boards holding kites which whisk them over breaking waves, producing acrobatic leaps and twists - have taken to using sophisticated computer modelling software to design the most efficient kites. They then share their ideas over the internet, refining their concepts before sending them to a manufacturer.

Sophisticated tools that let individuals take part in the process of creation, the internet as a means to draw together communities of like-minded people, a willingness to share ideas for the common good - these are the basic ingredients of a new approach to innovation.

The information technology industry has not merely created the means for these practices to take root. In the form of the open source software movement, it has also provided one of the most powerful examples yet of distributed innovation. And, thanks to the experiments in software licensing behind Linux and other open source programs, it has created a new framework for defining intellectual property rights when the brain power comes from a broader community.

Even corporate giants are starting to learn from this. Microsoft, for instance, may take issue with many of the claims made for open source products but it does not dispute the power of some of the new working practices that are bringing them about.

Developing a Corporate Culture for the Government

The Boston Globe ran an opinion piece today, "Fixing Government after Katrina," by Yossi Sheffi, author of The Resilient Enterprise.  Sheffi finds that:

The more resilient organizations were better prepared and had designed their supply chains with greater flexibility in mind. Close examination, however, also showed that such companies have something in their DNA that makes them more resilient, a certain corporate culture that helped them survive and event strive.

In the piece, Sheffi provides examples of three things that could have been done to lessen the disruption and devastation Katrina has caused:  Empowerment of front-line employees, constant communications, and the big picture.  He finds that "what has to be done is strikingly obvious--instill a radical change in organizational culture."

Proactive Companies Lessen the Impact of Katrina

John Robb's Weblog looks at The Resilient Enterprise author Yossi Sheffi's views on the Katrina response--finding that Sheffi is becoming an expert on resilient enterprises.

He details the pro-active actions companies took (for example: Walmart  and Home Depot) took to mitigate the impact of Katrina. Why did companies move faster and with more foresight than government? Example on the response of Hilton hotels from Business Week:

FRIDAY, AUG. 26 A colleague, David Blitch, hands Sawyers a weather report, saying "Katrina is aiming right for us." With the general manager on vacation, Sawyers tells the staff to offer all comers half-price rates; the $95-a-night fee goes mostly uncollected.

SATURDAY, AUG. 27 Very quickly, half the hotel's rooms are booked up, and many are packed with extra family members. An additional 200 reservations come in. Meanwhile, about 450 employees and their families have taken cots into the health club. By nightfall, Sawyers counts some 4,500 occupants, plus various pets. He cuts off more reservations: "I don't want to overtax our resources."

WEDNESDAY, AUG 31 They decide it's time for everyone to leave. Hilton executives arrange for 19 charter buses, paying wary drivers extra to make the trip from Texas.

Yossi's view is that resilient companies have a corporate culture that pushes decision making to the periphery. In Toyota, for example, anybody on the production line can stop the line if they see a problem. This culture of responsibility runs from the top to the bottom. "People in resilient organizations know that when disruption is evident there is no time to go through the bureaucratic processes."

Flexible Business

Why were many businesses prepared for Hurricaine Katrina and the government was not?  Companies like Wal-Mart knew which items would be in high demand and stocked those items well in advance (and they knew strawberry pop tarts would be popular).  Dr Yossi Sheffi, author of The Resilient Enterprise, discussed the flexibility and resiliency of businesses  when faced with disasters such as Katrina with Robin Young on WBUR's "Here and Now."  He also made some suggestions on how the government can learn from what businesses are doing in order to improve their response to catastrophes.

Business Blog Reviews Resiliency

An excerpt from a review of The Resilient Enterprise on the 800-CEO-READ blog:

In this world of "lean inventory" this is a cautionary book that needs to be taken seriously because the best way to learn is from other’s mistakes, rather than our own....I enjoyed and learned a lot from this book.

Yossi Sheffi on Preparing for Disaster

Yossi Sheffi was quoted in a Traffic World article on the effects of Hurricane Katrina on shippers:

"It many ways, now is too late," Yossi Sheffi, the director of the MIT Center for Transportation and Logistics and author of the forthcoming book "The Resilient Enterprise," told us.

"Those who made preparations beforehand, who had the critical route alternatives identified and in place, would have had the best chance of recovering from this with the least amount of damage," Sheffi said as the scale of the disaster was still unfolding.